Risk assessment

Moderate growth due to underinvestment

Growth in 2019 will continue to be predominantly driven by private consumption, which represents more than 80% of GDP. Household demand will be sustained by strong flow of expatriate remittances, supported in turn by a persistently dynamic labour market in the United States, the leading destination for Guatemalan emigrants. The accommodative monetary policy in place since 2013 (key interest rate at 2.75%) and inflation, which is contained within the central bank's target range (4+/-1%), should stimulate domestic demand as a whole. From the production point of view, the agricultural sector is expected to grow more dynamically owing to base effects following 2018’s climate events and volcanic eruptions. The construction sector is expected to benefit from reconstruction activities and infrastructure projects implemented by the government in the run-up to the June 2019 elections. Investment, however, will still be constrained by the lack of infrastructure, the strained political climate and a still deficient business environment (98/190 in the Doing Business 2019 ranking). The lack of an agreement between the government and Canadian company Tahoe regarding the operation of the Escobal silver mine is also dampening investor confidence. The Supreme Court's decision at the end of 2017 to suspend Tahoe's operating licence for failing to respect the Xinca indigenous people’s right to be consulted, which was upheld in September 2018, requires the company to renegotiate with local communities before it can resume its activities.

Fiscal revenues still too low in the absence of reforms

Guatemalan public finances are characterised by a structural lack of tax revenue (11% of GDP in 2016), limiting the resources available for public spending and investments that are required to fight poverty (health, education) and improve infrastructure. The highly fragmented political landscape leaves little hope for a major tax reform. In this context, budget implementation remains weak, with actual public expenditure often lower than planned in the budget. While expenditure in the 2019 budget will mainly be financed through public debt issuance, criticism has been levelled at the lack of anti-corruption measures. Public debt is still low but its service is relatively high relative to revenues(13%).

On the external accounts side, exports are expected to grow more slowly, as brisk demand for textile exports in the United States fails to compensate for a weak performance by agricultural exports on the back of relatively low coffee and sugar prices. At the same time, imports are set to increase, mainly linked to higher prices for commodities. The trade balance deficit will be largely offset by expatriate remittances. The reduction in the current account surplus, due to slower growth in remittance flows, is however expected to depress the Guatemalan quetzal, which should remain on a downward trend through 2019. Even so, depreciation is expected to remain limited in view of the country's strong external position (foreign exchange reserves equivalent to 7.4 months of imports at the end of September 2018).

A tense political climate on the eve of the presidential elections

Ahead of the presidential election in June 2019, the political climate in Guatemala remains strained and shaped by corruption cases and tension between the government and the judiciary. President Jimmy Morales and his administration are in a power struggle with the International Commission against Impunity in Guatemala (CICIG), the UN-backed anti-corruption commission that has, among other things, launched a corruption investigation against Morales and his entourage. After banning CICIG leader Ivan Velázquez from re-entering the country, President Morales announced in September 2018 that he would not renew the commission's mandate when the current one expires in August 2019. In this setting, the fight against corruption will be at the heart of the June 2019 presidential elections, which will feature a second round in August if no one wins an outright majority in the first round. The fragmented political landscape means that the potential winner is still uncertain, while President Morales is constitutionally barred from running for a new term. Whoever wins the election will certainly have to form a coalition to govern, which will severely limit their ability to act. The fight against poverty and insecurity, as well as migration issues and anti-corruption actions, will be the main priorities of the new administration.